According to the SBA (SBA, 2022), there are four major business entities: corporations, partnerships, limited liability companies (LLCs), and sole proprietorships. The objectives, degree of risk tolerance, and intended tax treatment of the company owner should all be considered when choosing a business organization form since each structure has benefits and drawbacks of its own. The LLC structure is what I would choose. LLCs provide the benefits of pass-through taxes, flexible management structures, and limited liability protection for their owners. The fact that both people and other companies may hold LLCs makes them a popular option for a variety of company kinds.
A firm owned and run by only one person is known as a single proprietorship. The owner personally owes all liabilities and debts of the firm. In other words, if the company cannot pay its debts, the owner’s assets may be utilized (SBA, 2022). The owner of a sole proprietorship has unlimited responsibility for the company, but they are simple to set up and need no paperwork.
A partnership might involve two or more people agreeing to manage a business together. In a general partnership, each partner shares equally in the profits and losses, but in a limited partnership, at least one member assumes full responsibility while the others do not (Small Business Administration, 2022). A partnership can only function with an agreement spelling out each partner’s responsibilities. Each partner is equally liable for the company’s obligations in a partnership.
Limited Liability Company (LLC)
By combining a partnership’s tax benefits with a corporation’s limited liability protections, limited liability companies (LLCs) are a hybrid company structure. In a limited liability company (LLC), the owners do not personally guarantee the company’s obligations. In certain cases, the LLC’s ownership and management structure may differ from usual (Small Business Administration, 2022). Although an operating agreement and articles of incorporation are the only legal documents required to form an LLC, continuing fees are connected with keeping the company operational.
A company exists independently from its shareholders legally. A company may have endless shareholders if it issues shares to do so. Shareholders are the owners of a corporation, and they are protected from personal responsibility for the debts and liabilities of the business. A corporation’s board of directors, executives, and shareholders make up a management structure more involved than other company forms (SBA, 2022). Profits earned by corporations are taxed twice: once at the corporate level and again at the individual level when paid out as dividends.
Steps to Form
The procedures necessary to establish a legal business entity differ from one state to the next and from one entity type to another. Formal documentation for establishing a sole proprietorship or partnership is minimal, but files for an LLC or corporation are more involved. When establishing a limited liability company (LLC), the necessary steps include submitting articles of organization with the state and drafting an operating agreement (Stowers, 2022). When establishing a corporation, the necessary steps include filing articles of incorporation with the state, drafting bylaws, and issuing shares.
Personal Liability for Owners
The structure of a business might have an impact on the owners’ liability. A lone proprietor or partner in a partnership assumes individual liability for the business’s debts and obligations. The proprietors of a corporation or limited liability company (LLC) are not personally liable for the debts or obligations of the firm.
How a company is taxed depends on its structure. Profits and losses from sole proprietorships and partnerships are passed through to the individual tax returns of the business owner. Double taxation applies to C-corporations, although LLCs and S-corporations are not (Stowers, 2022).
Establishing a single proprietorship is the cheapest and most straightforward option for starting a company. The business’s owner has unrestricted discretion over all operational matters. The owner’s personal tax return includes profits and losses from the company (SBA, 2022). The company’s structure may be altered or dissolved at the owner’s whim and fancy.
The owner’s assets are on the line since they are liable for the company’s debts and commitments. Since sole owners cannot sell shares or stakes in their businesses, it might be difficult to attract investors (Stowers, 2022). Due to the inherent challenges of growing and managing a firm with just one owner, most sole proprietorships are necessarily small in scale.
Unlike corporations, partnerships may be formed with little effort and expense. Partners can operate the firm more efficiently by combining their strengths. Compared to corporations, partnerships provide more autonomy in decision-making and organizational structure (SBA, 2022). Pass-through taxes, in which the partnership’s gains and losses are passed through to the partners’ tax returns, is another perk of the partnership structure.
All partners share equally in the responsibility for paying any debts or other obligations incurred by the partnership. When company partners disagree, it might disrupt daily operations. Since partnership ownership is not divisible, it might be hard to recruit investors and raise money. Also like sole proprietorships, partnerships may end when one of the partners dies or quits the business.
Because LLC owners have limited liability, their private assets are often safe from legal action. Profits and losses from an LLC are passed through to the owners, who then declare them on their individual tax returns. An LLC’s management and ownership structure may be altered to suit its members’ needs.
The initial costs of forming an LLC might be higher than those of a single proprietorship or partnership. There is a higher administrative and recordkeeping burden with an LLC. Due to the inability to issue shares or sell ownership stakes, limited liability companies (LLCs) may have trouble attracting investors (SBA, 2022). In the event that a member of an LLC dies or quits the business, the firm will likely dissolve.
Shareholders’ personal assets are often shielded from corporate debts because to the limited liability protection provided by corporations. Stock and interest sales are common methods for corporations to obtain money (SBA, 2022). Since corporations have their own distinct legal existence, they may persist even if their stockholders do.
Compared to other organizations, corporations are more costly to establish and manage. In a corporation, taxes are paid twice: once on the company’s income and once on the dividends paid to shareholders. Corporations may be subject to higher regulatory obligations and governmental authorities’ scrutiny. Owners of shares have a limited amount of influence over how the firm operates and makes decisions.
U.S. Small Business Administration (SBA). (2022). Choose a business structure. Choose a Business Structure. https://www.sba.gov/business-guide/launch-your-business/choose-business-structure
Stowers, J. (2022, August 4). How to Choose the Best Legal Structure for Your Business. Business News Daily. https://www.businessnewsdaily.com/8163-choose-legal-business-structure.html